Delhi High Court on 31 January rejected the Malvinder Singh group’s challenge to enforcement of an international arbitration award obtained by Daiichi Sankyo Company. Under the award, the group has to pay to Daiichi ₹25.6 billion (US$394 million) as damages, pre-award interest of ₹8.5 billion, Daiichi’s legal costs of US$14.5 million and US$599,250 towards Daiichi’s arbitration costs.
Members of the group had sold their interest in Ranbaxy Laboratories to Daiichi for ₹198 billion. According to Daiichi, the sellers had fraudulently concealed and misrepresented the severity of US regulatory problems faced by Ranbaxy at the time of the sale. According to the sellers, in addition to information available on the website of the US Food and Drug Administration (FDA), Daiichi, prior to the transaction, had access to the data room which contained all correspondence and other documents relating to the FDA investigations. Daiichi bought the stake with full knowledge on an “as is where is basis”. The majority of the arbitrators (former chief justice AM Ahmadi dissenting) accepted Daiichi’s claim. The award was brought before the high court for enforcement by Daiichi.
The sellers resisted enforcement claiming that the award was contrary to Indian law (which governed the sale and purchase agreement), opposed to public policy and in any event beyond the arbitrators’ jurisdiction. The sellers’ argued that as Daiichi had affirmed the transaction of sale and purchase of Ranbaxy shares it could not claim damages; it could only insist that it be put in the position it would be in had there been no false or fraudulent representation. Daiichi had sold the Ranbaxy shares at a profit to Sun Pharma. Any damages were consequential loss, which cannot be granted under Indian law. By awarding pre-award interest on damages the arbitrators had awarded multiple damages. Under the award minors within the seller group, who could not contract, were made liable. The sellers challenged jurisdiction on the grounds that the contract expressly excluded consequential loss and that Daiichi’s claim was barred by limitation, which under Indian law is a jurisdictional issue.
The high court allowed enforcement, rejecting all but one of the challenges, i.e. the award against minors within the sellers’ group. The court noted that it was well settled (since the 1984 ruling in Renusagar v General Electric) that enforcement of a foreign award could be refused on three narrow public policy grounds – if it was contrary to the fundamental policy of Indian law, opposed to the interests of India or contrary to justice or morality.
By awarding damages the arbitrators had put Daiichi in the position in which it was before the purchase of the Ranbaxy shares. This would mean that Daiichi should be compensated for the cost of having its money tied up for six years until the sale of the shares to Sun Pharma. The arbitrators had properly reduced Daiichi’s claim to the extent of the dividend received on Ranbaxy shares and consequential damages had not been awarded. In quantifying damages and selecting the method for computing them the arbitrators had not reached “a palpably wrong computation of damages to warrant a conclusion that the award is in contravention of the fundamental policy of Indian law”.
The court held that pre-award interest on damages was legitimate, noting that in Renusagar an award for compound interest was found not to be opposed to Indian public policy. As regards the challenge on limitation the court noted that the arbitrators had concluded that Daiichi’s claim could arise only in November 2009, when with reasonable diligence it could have discovered the fraud or misrepresentation.
The sellers’ challenge as regards liability of minors was three-pronged. One, Daiichi had failed to have guardians appointed for the minors. Two, minors could not be liable for fraud or misrepresentation by agents. Three, the award was disproportionate; although minors had received only ₹1.4 million out of the sales proceeds, they were made liable for the entire amount of the award.
As the minors had been represented by lawyers throughout the arbitration, the court disregarded the first factor. Procedural non-compliance in the absence of substantive injustice to minors was not relevant.
The court accepted that since a minor is incapable of appointing an agent, a minor could not commit a fraud through an agent. A minor represented by a natural guardian would not be liable for fraudulent acts of the guardian. The law protecting minors is fundamental to public policy.
The third element, although rendered moot, also found favour with the court.
The Supreme Court dismissed petitions for special leave to appeal this judgment.
Shreya Gupta and Sneha Jaisingh are senior associates at Bharucha & Partners.
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